AUDIT COMMITTEE DECISION AUTHORITY, FINANCIAL RISK GOVERNANCE, AND FINANCIAL REPORTING QUALITY: A BEHAVIORAL GOVERNANCE PERSPECTIVE

Abstract

Despite extensive corporate governance reforms, financial reporting quality remains a persistent concern in many emerging markets, where audit committees often exist to fulfill regulatory requirements but lack substantive influence over managerial decision-making. Prior research has predominantly focused on audit committee structural characteristics, such as independence and expertise, offering limited insight into whether audit committees possess sufficient decision authority to effectively constrain managerial opportunism. The mechanisms through which audit committee authority translates into improved financial reporting outcomes remain insufficiently understood, particularly in contexts characterized by concentrated ownership and evolving governance institutions. Addressing these gaps, this study examines the relationship between audit committee decision authority and financial reporting quality, with financial risk governance proposed as a mediating mechanism.  Using an unbalanced panel dataset of non-financial firms listed on the Saudi Stock Exchange over the period 2015–2022, using firm fixed-effects regression analysis with robustness checks. Results indicate that audit committee decision authority is positively and significantly associated with financial reporting quality. Financial risk governance partially mediates this relationship, suggesting that audit committee authority improves reporting outcomes by strengthening risk governance mechanisms. These findings demonstrate that audit committee effectiveness depends not merely on structural presence but on the extent of substantive decision-making authority. The study contributes to corporate governance literature by shifting the focus from symbolic oversight to decision rights and by identifying financial risk governance as a key mechanism linking audit committee authority to reporting quality. The findings offer important implications for regulators and policymakers seeking to enhance governance effectiveness in emerging markets.